How This Millennial Founder Created a $730 Million Fashion Startup--With the Help of an Algorithm

Katrina Lake, daughter of a Japanese immigrant who will be the first solo female founder of her generation to take her startup public, was turned down by investors who weren't interested in fashion.

CREDIT: Molly Cranna

In February 2012, Eric Colson, then Netflix's VP of data science and engineering, was introduced to an unknown entrepreneur named Katrina Lake. The founder of Stitch Fix--an e-commerce company that pairs an army of stylists with an arsenal of data to deliver clothing--asked Colson if he'd consider becoming an adviser to her one-year-old company. Colson declined. "I'd dismissed the Stitch Fix business model as interesting but sort of whimsical," he says.

But a few weeks later, the concept was still tugging at him. So Colson invited Lake for a glass of wine, and by the time his was empty, the data personalization whiz had concluded that the person across the table was an intellectual clone of his longtime boss, Netflix founder Reed Hastings. "You feed them a little bit of information and they can paint a vibrant picture that matches reality," says Colson. Within a few months, he'd left Netflix to become Stitch Fix's chief algorithms officer.

Colson ranks as one of the many who's been surprised by Lake. The Harvard MBA has proven to be one of the smartest founders to emerge in e-commerce. As traditional retail crumbles, last year her San Francisco-based online styling company earned $730 million in revenue, and it reported filed confidential plans to go public this fall with an estimated market capitalization of $3 billion or more. Stitch Fix has raised a relatively small $42 million, yet is one of the few upstarts that is already profitable--and it has been since 2015.

Like many founders, Lake started her company because the one she was looking for didn't exist. "I wanted to work at whatever company was going to be the future of retail," says Lake, who was a consultant and worked in venture capital before she realized no one had successfully merged fashion with data.

In 2011, drawing on her experience with her sister--a clothing buyer who often sent Lake style suggestions--the then-27-year-old created a personal shopping website. It hardly had algorithmic sophistication: Lake used Survey­Monkey to track customers' preferences, and then toted armloads of garments to their homes, accepting checks to cover the $20 styling fee.

By 2013, the business was taking shape. With Netflix's Colson on board, the team collected vast amounts of data on Stitch Fix customers--body dimensions, pattern preferences, what clothes they'd kept, what clothes other people who'd kept those clothes had also kept--to arrive at astonishingly accurate predictions. A Stitch Fix stylist would then take a prediction and determine whether it seemed right for particular shoppers--today resulting in 24 percent of customers sticking with the subscription service for at least nine months, according to one analysis of sales data.

"My hope is we can show venture capitalists that companies are successful even though they may not be the passion they have."

Lake says her company's human-filtered precision--in which 3,300 stylists work with 600 clothing brands, including its own private label--will keep aggressive competitors like Amazon at bay. "Consumers don't want thousands of jeans they can read all these reviews of," she says. "They want to put on the one pair of jeans they look awesome in."

As she's about to take her company public, Lake reflects on the investors who didn't take her seriously. She recalls one confessing: "Your business is on fire, your team is great, but I just don't feel passionate about women's apparel." (As reported in June, Lake was among the founders sexually harassed by Justin Caldbeck, managing director at Lightspeed Ventures, and an observer to Stitch Fix's board, a role that he lost after Lake reported his actions to the firm.) Lake hopes Stitch Fix's success will prompt VCs to--as she puts it diplomatically--reexamine their mental filters. "At least I know the capitalist part of the venture capitalists will be regretful of the decisions they've made," she says.

Editor's note: This story was updated from the print edition to clarify that Katrina Lake worked in venture capital but was not an investor, and that information about Stitch Fix's IPO plans was based on news reports. The company has not commented on its IPO plans.